Monday, February 22, 2010

According to December '09 data released today by Moody's, commercial real estate prices in the U.S. are up 5% from their October lows. They are still down by a whopping 41% from their late 2007 highs, however, which is much worse than the 30% decline in nationwide housing prices according to the Case Shiller data. Nevertheless, I take this as preliminary evidence that we have seen the bottom in commercial real estate prices. (The bottom in residential real estate prices still seems to have been in the March-April '09 time frame.)

Combining the news on real estate prices with the prices of commercial real estate-backed mortgage securities in the chart below—prices have been rising for much of the past year—gives the same conclusion: as far as the market is concerned, we have seen the worst of the news from the commercial real estate sector, and we have probably seen the bottom in prices.

This stands in sharp contrast, of course, to the steady drumbeat of bad news from the commercial real estate sector, and the expected increase in default rates on commercial real estate loans. Hard as it may be to understand, I think this is just one more example of how the market anticipates events. Even though actual default rates are likely to rise in the coming months, the market today is telling us that the default rates we are likely to see are going to be less than what the market had expected and feared some months ago. The reality is going to be bad, indeed, but it is not going to be as bad as many had feared. All of the bad news has already been priced in. This is good news.